CREDIT SUISSE: China has become a victim of its own success

China's slowdown took
investors by surprise, and it hurt the whole global
economy.Stringer/Reuters

China's "weight-gain" is the very thing that caused its slowdown,
according to a note by Credit Suisse.

The bank says the country became so big as a share of the world's
industrial output that it is "no longer possible to profitably
outgrow non-Chinese demand by such margins."

China's manufacturing profit margins have been falling since
2011, and there has been a decline in real-terms in manufacturing
investment.

Although Credit Suisse calls the Chinese slowdown a "natural
convergence," the fall in investment profitability in the face of
a rising output share took investors by surprise, since they
based 2016 growth on historical trends.

This nasty surprise created a depression in the commodities
related markets, particularly in mining, shipping, and energy.
This led to a global credit risk, sharp exchange rate movements,
and a slump in global growth. "A shock that originated in China
became a global shock," says Credit Suisse.

Here's a look at China's manufacturing investment slowdown in the
last decade:

The main problem was that China's growth is "unbalanced," with
investment making up almost half of its GDP but its consumption
is much smaller than other economies per capita. As such, Chinese
investment is usually directed at its export capacity:

"Thus, the demand side impact of China's rise is largely about
what inputs. Chinese firms were previously consuming in order to
expand investment," the note says.

Despite the imbalance, the Credit Suisse predicts that although
China will be risk-averse for quite a while "it is likely that
over time the effects of the commodity price shock and slower
Chinese growth will dissipate:"

"We think it is possible that China will find a steady growth
trend in the mid-single digits for trade, IP, and investment.
Although this is less than the old trends, it would still permit
slow rise in China's share of global output, and it would allow
global growth to return to something near its 3% trend by the end
of 2017."

The note concludes by saying that it's better that China's
slump happens now rather than later, after a few more years of
unmitigated growth.

"With China having added so much capacity recently, and the
commodity sectors likely continuing the epic investment boom, the
world would now be facing the most serious set of deflationary
risks in decades, in our view. In other words, the absence of the
recent China slump would likely have been much more deflationary
than the slump itself!"